More weak banks in IMF doomsday scenario as AI boom fuels risks

More global banks would be pushed to the brink in a doomsday scenario compared to a year ago, according to the International Monetary Fund, which said AI-related challenges could imperil banks even as profits soar.

The IMF’s latest stress test examined how banks would cope with an AI crash, soaring government bond yields and an economic slowdown. Under this scenario, 22% of global banking assets would be held in 110 “weak” lenders, whose core capital ratio would fall below 7%, or a higher threshold for the world’s most complex banks.

In last year’s test, 18% of banking assets sat in 88 “weak” lenders under stressed conditions. The IMF’s Athanasios Vamvakidis said the scenarios for each year reflected risks that were considered pertinent at the time, based on a common methodology. Risks have amplified this year across the global economy amid energy supply disruption, fears of an AI bubble and rising yields.

“It’s a good reminder that we shouldn’t take resilience as a given,” Vamvakidis said, adding that the analysis should act as counsel for authorities who are “thinking about regulatory changes.” Policymakers in the US have led a wave of global deregulation, propelling banks to record profits and bumper shareholder payouts.

The stress tests — which do not give results for individual lenders — modelled how banks would fare over a three-year period of worsening geopolitical tensions, trade fragmentation and energy supply challenges, as well as a “a sharp reassessment of AI-related valuations.”

Weak banks were “concentrated among smaller institutions and a limited number of large banks,” the IMF said. Asian banks, excluding China, experienced the most dramatic capital decline over the scenario, followed by European lenders. North American banks were seen as more resilient because their strong earnings rebuilt capital.

Banks’ links to non-bank financial institutions was described as “manageable” for now but “could prove a source of fragility.”

The IMF noted that a “subset” of North American banks with higher lending to NBFIs experienced “significant capital depletion” under the scenario. US banks’ exposure to non-bank financial institutions, including both drawn and undrawn commitments, has risen to 134% of their Tier 1 capital, up from 119% a year ago. The figures for the EU and UK are much lower, but also likely less comprehensive since public data is much more available in the US.

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